UK economy on ‘recession watch’ after unexpected contraction

The UK economy shrank unexpectedly in October after a fall in production output and a downturn in the services sector ahead of the Budget.

GDP fell 0.1 per cent in the month, data from the Office for National Statistics showed. Economists had expected a return to modest growth of 0.1 per cent.

It marks two straight months of contraction for the first time since the Covid-19 pandemic after the economy shrank 0.1 per cent in September. Chancellor Rachel Reeves said the numbers were “disappointing”.

On a three-month basis, the economy eked out 0.1 per cent growth – in line with expectations and the slowest pace since January.

The ONS’ data showed growth in the services sector was flat in October, while production fell 0.6 per cent and construction fell 0.4 per cent.

Liz McKeown, the ONS’ director of economic statistics, said: “The economy contracted slightly in October, with services showing no growth overall and production and construction both falling.

“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics, and legal firms.

“However, the economy still grew a little over the last three months as a whole.”

The pound fell as much as 0.44 per cent against the dollar after the data was released, hitting a two-week low.

The figures for October reflect the economy’s performance in the run-up to the new government’s first Budget at the end of the month, which increased taxes by £41bn per year.

UK business confidence has slumped since the Budget as major firms warn tax-raising measures like a hike in employers’ national insurance contributions will push up prices and stall hiring.

The Confederation of British Industry (CBI) now expects Britain’s economy to grow by just 1.5 per cent next year, it said in its latest economic forecast, a sizeable downgrade from the 1.9 per cent it predicted for 2025 in June.

Ben Jones, the CBI’s lead economist, said on Friday: “Following these disappointing figures, businesses will be glad to see the end of 2024. Nevertheless, firms remain hopeful that things will improve in the New Year.

“It may take a few more months for firms to work through the impact of the sharp increase in employment taxes outlined in the Budget and adjust their hiring and investment plans accordingly.”

Prime minister Keir Starmer has vowed to boost GDP growth to 2.5 per cent a year – an ambitious target after just 0.3 per cent expansion in 2023.

Reeves said: “While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth.”

Bank of England policymakers are expected to leave interest rates on hold at 4.75 per cent at their next meeting on 19 December, having lowered borrowing costs twice this year from a post financial-crisis high.

“UK economic conditions should fare a little better in 2025, as the temporary sugar rush from stronger public spending and investment helps to lift GDP growth, despite strengthening global headwinds,” said Suren Thiru, economics director at accountancy body the ICAEW.

Julian Jessop, economics Fellow at right-wing think tank the Institute of Economic Affairs, said: “The second successive monthly fall in economic activity in October should put the UK firmly on recession watch.

“The loss of momentum is not contained to the UK. Indeed, the manufacturing sector appears to be struggling even more in the rest of Europe, notably Germany and France.